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But Lukasz Tomicki, founder of LRT Capital Management, a hedge fund with $120 million in assets, says don’t expect stocks to continue rising.
“I think the market has priced it in perfectly,” Tomicki told Business Insider. “When you look at the valuation situation and the interest rate situation, it’s very hard to justify buying stocks here.”
Tomicki says his optimistic outlook is a matter of simple math.
“If you look at valuations, you start with a 10-year yield of 4%, add a 4% equity risk premium, which has been the case historically, and you get a legitimate P/E of 12.5. And now, historically 12-month EPS is about $190,” he said. “We put a 13% growth rate on this, which is what analysts are expecting, which by the way is double the historical average, which makes us like $220. $220 x 12.5 If you do the math, you’ll see that it’s 40% lower than the current S&P.
Mr. Tomickey continued: “Are we saying the market is going to drop 40%? Not necessarily, but you can play with the numbers. Unless you think about it, it’s very difficult to think of a scenario where you can get good, strong positive returns for the market.”
The S&P 500 currently has a forward 12-month P/E ratio of 22.88, which is multiplied by earnings per share of $220 to arrive at the index’s current level. The P/E ratio is above the median since 1971 of about 18, but well within the historical standard deviation range, according to GuruFocus data. Analysts have been raising their profit forecasts in recent months as labor market data proves resilient and the Federal Reserve appears poised to cut interest rates at some point in 2024.
But Tomicki is skeptical that macroeconomic conditions will improve. He believes a recession is likely to occur in 2024. He cited an inverted yield curve, a well-known indicator of a recession, as one reason a recession could be in store. This is because banks have an incentive to park their money in short-term government bonds in search of guaranteed high yields, rather than taking on excessive risk by lending at low interest rates.
Another reason he is bearish on the economic outlook is that the money supply is shrinking and liquidity in the economy is shrinking. Additionally, government budget deficits mean borrowing demand remains high, meaning interest rates remain high.
When interest rates rise for an extended period of time, they generally slow the economy because debt for things like housing, cars, and business expansion becomes more expensive and consumption slows. When spending slows, jobs are cut, which further hurts spending and ultimately pushes the economy into recession.
Still, the economy has so far held up despite rising interest rates. The consensus among investors and economists is that the Fed will achieve a soft landing, controlling inflation while avoiding large job losses in the labor market.
4 safe-haven stocks to bet on
Given Mr. Tomicki’s bearish outlook, he is placing his portfolio in defensive companies, or companies that are less susceptible to economic slowdowns.
his greatest possession is RLI (RLI), an insurance company that is generally considered a defense industry. In today’s environment, rising interest rates allow insurance companies to benefit on the investment side of their business. Insurance companies make money in part by investing the premiums they collect in bonds. Tomicki also said the underwriting track record is proven.
Tomickey’s second largest holding is chemical(Che)is a holding company that owns both a hospice company and commercial plumbing businesses called VITAS and Roto-Rooter, respectively. Although these are unrelated in most respects, both are much less susceptible to economic downturns, he said, noting that health insurance pays for most hospice costs and pipe breaks in all economic environments. .
The 3rd one Wyndham Hotel & Resorts (W.H.)is a budget hotel company that owns Super 8, Travelodge, and Days Inn. Tomickey said lower-priced hotels in the hotel industry typically have less volatility during economic downturns.
“Marriott and Hilton are more volatile and more tied to the economy,” he said.
and the fourth is Northrup Grumman (N.O.C.), a defense company that manufactures weapons and fighter aircraft. Tomicki said the company’s business model is predictable and relatively immune to recessions.
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